T. Rowe Price European Smaller Companies Equity, Standard Life Investments Europe ex UK Smaller Companies and Threadneedle European Smaller Companies are the most consistent IA European Smaller Companies funds of the past decade, beating the sector average in eight of the past 10 calendar years.
Of the 20 funds in the sector with a track record long-enough to be included in the study, another four funds beat the sector in seven of the past 10 calendar years.
Performance of funds vs sector
Source: FE Analytics
Ben Griffiths, manager of T. Rowe Price European Smaller Companies Equity, bases his strategy on two principles. The first is identifying outstanding companies that will deliver a strong compound growth rate over the long term.
“An internal study of the European small‑cap universe that we conducted last year showed that these companies add a significant amount of the value,” he explained.
The second principle Griffiths stands by is running his winners.
“If you find a great business, keep it,” the manager continued. “I don’t sell a company unless there is a genuine reason to – and typically, valuation is not the driving force.
“I learned this the hard way – I once held a German combination‑oven manufacturer, Rational. It is probably one of the best companies that I have come across, but I managed to convince myself to sell it because it became a bit expensive.”
The analysts at FE Invest said that despite Griffiths’ relatively short tenure – he only joined the fund at the start of 2016 – he has proved he can add value through stock selection, while the small size of the fund allows it to be true to its strategy.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
However, they warned the fund has some exposure to the UK, meaning investors with existing UK small-cap exposure in their portfolios should be mindful of the overlap.
“The fund would be best suited in a portfolio alongside a fund with broad large-cap UK and/or a European (ex-UK) equity exposure,” the analysts added.
T. Rowe Price European Smaller Companies Equity has made 323.41 per cent over the past decade compared with 219.18 per cent from its IA European Smaller Companies sector and 186.82 per cent from its MSCI Europe Small Cap benchmark.
The €214.5m fund has ongoing charges of 1.12 per cent.
Andrew Paisley, manager of the Standard Life Investments Europe ex UK Smaller Companies fund, uses the group’s proprietary quant tool, the Matrix, to screen the small-cap universe. This allows him to uncover stocks with the quality, growth and momentum characteristics that he believes drive superior risk-adjusted returns.
Having established the most promising companies, he then carries out fundamental analysis to produce a concentrated portfolio of best ideas.
“Through leveraging quantitative and qualitative insights, our smaller companies team have demonstrated a consistent ability to identify and capture tomorrow’s larger companies today,” said the firm.
“The fund has delivered outperformance in a manner consistent with other funds managed by the team, offering clients a lower risk way of investing in this under-researched and typically under-owned asset class.”
In his most recent note to investors, Paisley said that while increasing concerns over global growth and rising political risk hit markets towards the end of 2018, investors appeared to refocus on bottom-up fundamentals at the start of the year.
“We remain focused on higher-quality companies with good growth prospects and strong operating momentum,” he added.
Standard Life Investments Europe ex UK Smaller Companies has made 298.25 per cent over the past decade compared with 194.44 per cent from its EMIX European Smaller Companies benchmark.
The £51m fund has ongoing charges of 0.96 per cent.
Last up is the £450.6m Threadneedle European Smaller Companies fund, which is run by FE Alpha Manager Mark Heslop.
Heslop has a quality growth style, favouring growing companies with high returns and competitive advantages such as brands that will enable them to sustain those returns.
Explaining the approach taken on the fund, he said: “Our main focus in managing this portfolio is stock selection, informed by macroeconomic and thematic views. We favour companies that have a competitive advantage and pricing power generated by brands, patented processes, regulatory barriers to entry and strong market positions.”
The analysts at Bestinvest said that while Threadneedle European Smaller Companies had a stellar record under former manager David Dudding, Heslop has now been in control for more than five years and has maintained its success.
“Heslop is part of a team of four specialising in European small caps and also benefits from the support of the wider European team which includes Dudding – the fund has a similar approach and shares some stocks with Dudding’s Threadneedle European Select product,” added Bestinvest’s analysts.
“Typically, this style of investing provides lower volatility returns and a degree of downside protection compared with the benchmark. However, it can sharply underperform in rising markets, particularly when these are driven by value stocks.”
Performance of funds vs sector over 10yrs
Source: FE Analytics
Threadneedle European Smaller Companies has made 289.05 per cent over the 10-year period in question. It has ongoing charges of 0.88 per cent.